Stocks close down again as credit worries remain

KateGibson

NEW YORK (MarketWatch) -- The selling of U.S. stocks accelerated ahead of the closing bell Wednesday, leading the Dow to close below the 13,000 level for the first time since the end of April amid sustained concerns about troubled credit markets.

"We're still finding out where a lot of these subprime mortgages are held - these things take a while to filter through," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank.

The Dow Jones Industrial Average
DJIA, -1.24%
ended 167.4 points lower at 12,861, its first close below the 13,000 mark since April 24. Of the Dow's 30 stocks, 29 ended in the red.

Shares of Countrywide Financial
CFC, +5.33%
slumped 13% after the mortgage lender was cut to sell from buy at Merrill Lynch, with the broker citing concerns about liquidity in the mortgage sector. See full story.

The Dow shifted gears along amid contrarian words from the New York Federal Reserve over its repurchases, with the Fed in the end saying it would take $7 billion in a "repo," where it buys securities from dealers, who then put the funds into commercial banks.

"If anything, it just goes to show how sensitive investors are to liquidity conditions," said Mike Malone, trading analyst at Cowen & Co.

The S&P 500
SPX, -1.54%
fell 19.8 points to 1,406.7, and is now in negative territory for the year, while the Nasdaq Composite
COMP, -1.94%
slid 40.3 points to close at 2,458.8, a four-month low.

At the New York Stock Exchange, volume hit nearly 2 billion shares, while declining issues outpaced advancers 3 to 1. At the Nasdaq, 2 billion shares were traded, with decliners ahead of advancers more than 2 to 1.

More credit woes

Stocks slid on Tuesday, with the Dow falling more than 200 points, amid further signs that trouble in the subprime mortgage market is prompting a tightening of credit.

Wednesday marks a key deadline for some investors because of a 45-day redemption notice period at several hedge funds.

Those, including some run by Goldman Sachs
GS, -1.86%
are nursing heavy losses, and investors would have to make withdrawal requests by mid-week to get cash by the end of the third quarter. Other hedge funds have lock-up periods running as long as three years.

Japanese banks including Mitsubishi UFJ reported losses from subprime exposure on Wednesday, while the Financial Times reported Bank of America
BAC, -2.27%
and Countrywide have refused to lend money when hedge funds use mortgages, collateralized debt obligations and subprime securities as collateral.

"The best case scenario is we don't get any headlines regarding the subprime mess, and maybe we can weather the storm," said Peter Cardillo, chief market economist at Avalon Partners.

KKR Financial Holdings
KFN
announced the sale of $5.1 billion of residential mortgage loans, saying it will no longer invest in such assets, and may need to record a charge of up to $200 million. The company also got a downgrade from Lehman to equal-weight. Its stock fell 31%.

Tame inflation

The Labor Department reported a 0.1% July rise in the Consumer Price Index - a measure of price inflation on food energy and consumer products.

The Federal Reserve monitors the data for signs of rising inflation, the Fed's largest worry. The core consumer price, which excludes volatile food and energy prices, increased 0.2% for the second straight month.

Both the headline and the core reading were in line with economists expectations. See full story.

Manufacturing activity in the New York area continued at a healthy pace in August, the New York Federal Reserve Bank said.

The bank's Empire State Manufacturing index inched lower to 25.1 in August from 26.5 in July. Economists were expecting the index to fall to 19.0.

The National Association of Home Builders reported home builders grew more pessimistic in August, with a monthly sentiment gauge dropping to its lowest level since early 1991. See full story.

H.J. Heinz Co.
HNZ, +0.37%
said it expects to report fiscal first-quarter sales growth of about 9% and earnings per share of 62 cents to 63 cents. Analysts, on average, expect the food company to earn 55 cents a share for the quarter. The company's stock gained 3.2%.

Deer & Co.'s
DE, -2.09%
fiscal third-quarter earnings rose 23%, with the agricultural equipment maker reporting earnings for the quarter of $537.2 million, or $2.37 a share, compared with $436 million, or $1.85 a share, a year earlier. See full story. Its stock rose 3.3%.

Other markets

On the New York Mercantile Exchange, gold futures finished unchanged, with the contract for December delivery closing at $679.70 on ounce. See full story.

Crude oil and gasoline prices rallied after the Energy Department reported large drops in weekly supplies. Crude oil futures advanced 95 cents, or 1%, to close at $73.33 a barrel. See full story.

Treasury prices climbed as investors fixated on credit-market problems. The benchmark Treasury note ended up 7/32 at 100 12/32, with its yield
TNX, -1.21%
falling to 4.704%. See full story.

The dollar gained against its European rivals, but continued to lose ground against the yen, with the greenback down 0.1% against the yen at 117.3 yen. The euro was down 0.3% at $1.3493. See full story.

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